Most are familiar with the benefit of a streamlined refinance process for refinancing a VA loan to another VA loan. It is typically used to lower an interest rate or term. But another very helpful Veteran benefit is the VA cash out refinance. Although, just because it is called a “cash out” refinance, that doesn’t mean a homeowner must receive cash. This Veteran Administration loan just calls anything but an interest rate reduction refinance loan (IRRRL) a cash out refinance. So the focus of this article is to explain how this refinance works and how it could benefit a qualifying borrower.
VA Cash Out Refinance Loan Allows the Following:
- Refinance a conventional, USDA, or FHA loan
- Pay off other debts
- Cash for home improvements
- Cash in hand
- Down payment for second home or rental purchase
- Pay off a construction loan
As you can tell, there are a lot of ways a VA loan can help. First of all, a VA cash out loan is only for a primary residence. So let’s explain these scenarios and why to potentially use a VA loan with them.
Refinance a conventional, USDA, or FHA loan. For various reasons, a Veteran may have something other than a VA loan. Maybe the eligibility was tied up at the time the mortgage was obtained. What if the Veteran put down 20% or more and wanted to save their VA eligibility? Maybe paying the funding fee wasn’t the best scenario then.
Pay off other debts. Maybe because of paying down the mortgage balance and/or an increase in appraised value, there is sufficient equity that could be used for consolidating debts. Paying off higher interest rate cards, loans, tax liens, home equity line of credit, mortgages on another property, or more could make sense. Among other things, paying off debts could increase cash flow for the household. But, always think through adding unsecured debt to your home. If the mortgage is not paid on-time, then it could result in a foreclosure.
Cash for home improvements. Are there improvements or additions desired for the home? Often there are home improvement projects such as a kitchen or bathroom remodel, but cash is not available to make the improvements. If the cash is available, it could still make sense to include it in the mortgage instead. With equity in the home accessed by a VA cash out refinance, it could allow the funds needed. Although, keep in mind that the home must be in good condition at the time of the appraisal. Additionally, there can be no work in progress at the time of the appraisal.
Cash in Hand. Sometimes there are just reasons to get cash. Maybe it is to pay a large IRS bill due, help a relative with situation, pay for college rather than a student loan, or others. For the most part, cash may be received by the borrower from a refinance.
Down Payment for a Second Home or Rental. Let’s say a Veteran wants to buy a vacation home or start investing in rental properties. Well, a cash out refinance could allow the Veteran to access the down payment funds for this purchase. A mortgage on the new property could be combined with the cash from the VA refinance to make the purchase.
Pay off a Construction Loan. A big and popular benefit of a VA refinance loan is that it will pay off a construction loan used to build a primary residence. So the construction loan helps build the home and VA will lend up to 100% of the appraised value to pay off the construction. The value is based on the “as completed” value too. This is a great advantage over other types of loan which require equity in the property or down payment in order to pay off construction loans.
No Appraisal Seasoning. Plus VA loans do not have a seasoning requirement to use appraised value. So for instance, if someone purchased or refinanced a home 6 months ago, the appraised value could be used in a new VA cash out refinance.
Cash Out Refinance After Divorce. If a Veteran is getting or has gotten divorced, it is ok for a cash out loan. So a Veteran still occupying the home may be able to refinance while the ex-spouse is removed from title. The cash out could even be used to pay off an equitable distribution to the ex-spouse.
Advantages of a VA Cash Out Refinance
You saw above that there are several reasons to use a VA loan for a refinance. Additionally, there are other large advantages for VA loans compared to other refinancing products. The first and probably biggest is that a Veteran may borrow up to 90% of the appraised value for the above refinance scenarios! The amount depends on the Veteran’s entitlement available, plus the percentage lowers once over the VA loan limit for the county. Other loan types like Fannie Mae, Freddie Mac, and FHA only allow a maximum of 80% of value for cash out refinances. USDA will not allow a cash out loan. That is an extra potential 10% in equity to access!
Then the next huge advantage is that VA loans do not have a monthly PMI fee. That means that even though the borrower is financing over 80%, the monthly payment will not include monthly PMI like other loans. Although VA loans do require a VA funding fee of 2.30 – 3.45% generally financed on top of the base loan amount. UNLESS, the Veteran is exempt from the funding fee because of a VA disability. When exempt from this cost, then VA widens the gap even further when compared to other loans.
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So we can lend as much as 90% of the appraised value, but how can you prepare for a VA appraisal?
How to Prepare for a VA Appraisal
On a purchase, you at least have something to go by for an approximate value. You would have a purchase price and a Realtor that can pull comparable sales. But on a refinance, there is not as much to go by for a VA appraisal value. There are things you can control as the home owner though and most have to do with property condition. We actually polled underwriters, processors, and VA appraisers to come up with a compilation of popular appraisal issues. So make sure to check out our article, “12 Things to Check for Before Your VA Appraisal“. This list and article could save time and money during the refinance process.
Termite Inspection Requirement
Any VA loan for a purchase or refinance, other than an IRRRL, requires a satisfactory termite inspection report. On a purchase, the Veteran is actually not allowed to pay for the report. Although on a VA cash out refinance, the Veteran may and usually does pay for the required pest inspection. The termite inspection is just another way of VA making sure that the Veteran’s property meets certain condition requirements. This report checks for wood destroying pests, wood damage, and moisture issues. If issues are found, they must be corrected. Check out our article that goes into more detail for you called, “Pest inspection requirements for VA loans“.
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Discuss if a VA cash out refinance makes sense
If you have questions about refinancing or purchasing a home using a VA or VA jumbo loan, please contact us today.